Only last December, China Telecom gave its rather pedestrian earnings growth a rocket boost with an 80 billion yuan acquisition of six provincial assets, more than doubling its subscribers. A flurry of earnings upgrades followed and the share price did not disappoint, reaching a new high of $3.45. Now the fixed-line carrier reveals it is considering taking the remaining 11 provincial networks off its parent's hands. Will the same virtuous recipe be repeated, or is this a less palatable offering? It would seem a surprise if those left for last were not the less attractive assets. Once again pricing is less of a concern, as the usual pattern of the parent selling the target provinces at a discount to price-earnings ratio should be repeated. It is assessing the future profitability that is more troublesome. For a fixed-line operator wiring up sparsely populated Inner Mongolia or Tibet is inevitably a harder task than in Shanghai or Shenzhen. Also, bringing these more backward provincial assets up to working order presents a more onerous undertaking. Forecast capital expenditure of US$1.4 billion for these new provinces also means these assets are unlikely to be immediately cash-flow positive. If all the assets are injected at once as speculated, the value of the transaction is expected to be in the region of US$7.7 billion, made up of a U$3.6 billion cash payment and US$4.1 billion in debt. The biggest difference from last December is that this time equity investors will need to dig into their pockets, possibly to the tune of US$2 billion. Aside from the overhang on the share price, on a more fundamental basis, the resultant boost to earnings per share will necessarily be less because of dilution from new shares issued. In reality, digesting another acquisition so soon after its last without an equity injection would be near impossible on inspection of China Telecom's stretched balance sheet. Much of this is a hangover from its unorthodox or aggressive accounting of acquisitions which understates assets. While 'pooling of interest-merger' accounting rather than the acquisition accounting - the norm peers China Mobile and China Unicom use - frees the profit and loss account from goodwill charges, it also means purchased assets do not get marked up to the acquisition price. In fact, the post-transaction circular reveals China Telecom's pro forma shareholder funds fell from 133 billion yuan to 119 billion yuan for the group as of June last year. Total debt, meanwhile, increased from 25 billion to 94 billion yuan. China Telecom's gearing is recorded as 44 per cent using total capitalisation of $215 billion as an asset proxy. This seems a stretch given only 10 per cent of China Telecom shares are freely traded. Using the more conventional measure of capital structure, shareholders equity, the gearing ratio is nearer 70 per cent. The upshot is these acquisitions are unlikely to have the impact of last December's move on earnings or sentiment for China Telecom. While accounting can make earnings per share look better, cash flow is less pliable, especially with cash-hungry new provinces coming on board. China Telecom's balance sheet is more of an issue if the fixed-line operator receives the uncertain privilege of building a third-generation mobile network. Perhaps waiting to see what comes with the new shares before buying the old ones is the most prudent move.